Widely regarded as Latin America’s answer to Amazon (AMZN), MercadoLibre (MELI) rode the e-commerce pandemic-led tailwinds last year. Sales and profits soared pushing MELI’s stock price from less than $500 per share to a 52-week high of $2,020.
However, MELI is now trying to recover, together with other top performing pandemic plays, following a tremendous pullback last month that saw the stock fall over 30% from its highs.
Now, as the shares settle around the $1,400 mark, investors are wondering what to expect going forward. A full rebound? Sideways from here? Or a continued pullback?
E-commerce was performing well before the pandemic hit, and it will continue to do so once it finally dissipates. But, while the company’s prospects remain bright, MELI shares have moved into over-valued territory and a further contraction may be expected.
MELI Stock And Its Valuation Problem
With its double-digit correction in the past month, some may see a “buy the dip” opportunity for this e-commerce play as its earnings projections indicate that the company remains firmly on the growth train.
But despite its 2022 projections, MercadoLibre stock remains richly priced at current levels, and with a forward price-to-earnings (P/E) ratio of 815x, shares are trading at a valuation well ahead of the likes of Amazon (AMZN), Alibaba (BABA), and other leaders in this space.
There’s certainly some justification for a premium, with earnings projected by analysts to soar 243% next year and a further 150% in 2023 to $15.22 per share. This would bring its forward P/E back into double digits of around 92x.
Despite the high potential for growth over the coming years, room still remains for further valuation contraction and another double-digit decline could be on the horizon as investors shift away from “stay at home” plays, and back into hard-hit stocks ahead of the overall recovery.
A Possible Pathway To Further Gains Rather Than Losses
A top-level view on the stock, focused mostly on valuation, makes it easy to come to a bearish conclusion for MELI stock. Yet, a pathway still remains for shares to gain rather than fall in the months ahead.
While triple-digit gains are unlikely, gradual increases may still be possible.
Amazon has the North American e-commerce business on lock. Alibaba has the same established advantage in China and other major Asian markets.
Argentina-based MercadoLibre holds equivalent market power across the major economies of Latin America, but unlike Amazon and Alibaba, it has much more runway ahead.
E-commerce penetration in its home markets remains in its early stages while its other business lines including fulfillment, payments, and advertising have room to expand as well.
In short, despite its recent earnings miss, MercadoLibre may have the ability to beat market expectations, which could fuel a gradual recovery in its stock price.
What Analysts are Saying About MELI Stock
According to TipRanks, MELI stock comes in as a Strong Buy. Of the 16 analysts to have provided ratings on the stock in the past 3 months, 13 rate it a Buy while 3 recommend a Hold.
As for price targets, the average analyst price target on MELI stock of $1,989.93 per share implies around 42% upside potential from current levels over the next 12 months. Price targets range from a low of $1,720 per share to a high of $2,500 per share. (See MercadoLibre stock on TipRanks)
Bottom Line: Prospects Remain Bright, Further Declines Look More Likely
Regardless of what you think of the stock, trends continue to bode well for MercadoLibre, and as the COVID-19 pandemic enters the history books, there’s no denying the long-term shift into e-commerce.
But, with its tremendous projected growth fully priced-in, and diminishing interest in last year’s winning stocks, MELI stock may be heading lower in the short-term.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
